Can Business Work for Both People and The Planet? They Must
03 July 2021
It has been more than six years since the governments of the world adopted the Sustainable Development Goals (SDGs), and almost five years to the day since they signed on to the Paris Climate Agreement. Big corporations said they would align their business practices towards sustainability.
How have they done?
There has been a lot of talk but not enough action.
Despite growing sustainability commitments by companies and investors, direct emissions from corporations increased by more than 10% between 2015 and 2019.
98% of plastic packaging is single-use and more than a third is not recyclable.
The global gender pay gap is still reportedly at 16%—despite the recognition that gender equality can stimulate growth and support environmental sustainability, as pointed out by experts such as former UN Women deputy executive director Lakshmi Puri.
Saving the planet is fundamental for the survival of future generations. Businesses must review and transform their way of working, and governments will have to support the inevitable challenges they will face.
The 2021 Financing for Sustainable Development Report concludes that the current business model is not changing fast enough to achieve our global ambition in terms of sustainability. This dissonance between the promise of private sector change and the reality is not lost on the broader public. Less than 20% of global respondents surveyed believed that the current system is serving them, and 56% believed that in its current form capitalism is doing more harm than good.
Where do we go from here?
First, we must change the rules of the game. An increasing number of investors recognise that profit and benefits to the environment and society are not mutually exclusive, and are demanding both. However, markets are taking too long to make this the norm despite the rise of Environment, Social and Governance (ESG) investments. As long as it is profitable to run environmentally or socially unsustainable businesses, there will be a misalignment between the goals of society and business.
Governments can change the rules of the game by updating policies and regulations. For instance, governments can impose carbon pricing and coordinate cross-border carbon taxes. When awarding public contracts, they can favour companies that integrate minorities and achieve gender balance. They can also ensure manufacturers are held responsible for the impact of their products on the environment. (E.g., policymakers should make mobile phone producers responsible for recycling the e-waste they generate).
Second, for the transformation of the private sector we must have transparency. Companies cannot be held accountable for their impact on sustainable development without proper and fair disclosure. Such disclosure will enable investors to make asset allocations in accordance with their sustainability policies.
Despite the increasing number of corporate sustainability reports, information published is often not comparable or complete, as companies report using different metrics and can opt not to disclose negative issues.
Regulators can improve transparency by consolidating sustainability reporting frameworks and mandating a minimum level of disclosure. They should also request companies to publish credible sustainability plans with measurable targets.
Investors must engage with companies and regulators to request disclosure of material sustainability risks and reward companies with transparent sustainability plans with greater investment.
Third, we must reinforce the credibility of sustainable investment products. The rise of green bonds and ESG funds has created momentum around sustainable investment products. A green bond label certifies that a specific activity financed is green, but says nothing about the greenness of the company’s strategy. There is, therefore, no strong evidence that the carbon intensity of firms issuing green bonds will decrease over time.
The discrepancy between the green bond labels and “green” ratings could encourage greenwashing or SDG washing. We need to complement green bond labels with “green” ratings of issuers (e.g. attesting to a company’s compatibility with a 2°C pathway).
There have been multiple, alternative efforts to create a common definition of sustainable development investing. Given the urgency of sustainability issues, regulators should facilitate the consolidation of such efforts to agree on a unified and effective basis for the market.
COVID-19 has strengthened the importance of partnership between governments and companies. They must use this moment to galvanize change.
The three actions outlined above can serve as a basis for governments and the private sector to forge a new business model together that works for both people and the planet.
For a better world, it is critical for private finance sectors to support and accelerate such challenging but necessary transformations of business.